This past week has been marked by significant developments in the United States, highlighted by President Donald Trump's conclusive electoral triumph, along with a policy adjustment from the Federal Reserve, which elected to reduce the overnight interest rates by 25 basis points. In response to these pivotal events, the Empire Life Investments Inc. team provides some explanation of the prospective implications on financial markets, with a particular focus on the U.S. market. The informed perspectives of Ashley Misquitta, Investment Strategist and Senior Portfolio Manager and Ian Fung, Senior Portfolio Manager have been collated and are presented here for a fuller understanding of the anticipated market dynamics.
What happened?
This election cycle was anything but ordinary, with unexpected twists and significant ideological divides coloring the campaign. Ultimately, Donald Trump's decisive victory provides more clarity to markets that often prefer the certainty of an outcome over the confusion of a protracted process. With Trump's win and Republicans performing well in congressional races, the possibility of a unified government could streamline fiscal policies, potentially leading to larger deficits but also enabling more agility in policy implementation.
Markets have responded – Big time!
Markets have responded to the election result with the largest post-election rally in U.S. history. Over the longer term, while history doesn't repeat itself precisely, it often provides valuable context for understanding how similar occurrences have influenced markets in the past. Market participants now have a new set of potential policies to consider as they assess the post-election economic terrain.
In the wake of President Trump's re-election, we expect that markets are likely to continue to respond favourably to the anticipated reduction in uncertainty. The prospect of a unified government under Republican control could lead to the efficient introduction of fiscal policies and a continuation of the economic catalysts observed during Trump's previous term, such as deregulation and tax policy favourability, which traditionally support corporate expansion and market vitality. Drawing from historical growth under Trump's initial presidency, despite potential alterations in policy direction and the circle of advisors, the market is poised to embrace similar pro-business strategies, forecasting an environment likely to foster further economic and market advances.
However, potential tariffs and immigration policies could introduce economic headwinds that warrant investor caution. Yet, within this framework, sectors like Financials, Energy, and Industrials may find themselves in a favourable position, likely to receive a boost from a Trump administration's policy priorities.
Navigating the interest rate environment
The Fed's 25-basis-point rate cut adds further complexity to the economic picture. Although indicative of a cautious approach to nurturing employment and inflation goals, it also highlights a delicate balance that the Fed seeks to maintain in an uncertain fiscal and economic climate. Investors may now question how quickly the economy will move and how this might sway inflation, affecting financial market variables such as stock prices and bond yields.
The Fed was hesitant to provide forward guidance at the meeting, preferring to remain data-dependent and evaluate policy decisions on a meeting-by-meeting basis. The Fed views the current policy stance as restrictive and will continue to gradually ease its policy stance towards neutral to preserve a soft economic landing. However, given the recent strength in economic activity data, and the persistence of inflation, risks skew towards a slower pace of easing and/or fewer cuts in 2025 than the Fed had originally projected. Uncertainty around fiscal policy remains an upside risk to growth, the fiscal deficit and potential Treasury issuance, which could continue to weigh on longer term bond yields.
Moving forward
From a financial markets standpoint, initial reactions to the election results show a tendency towards a stronger stock market, elevated bond yields, and a firmer U.S. dollar. Monitoring how markets calibrate to the new administration's policies will be key, as will remaining vigilant to any shifts in the Fed's stance given the fresh economic circumstances.
As markets acclimate to the post-election environment and digest the Fed's rate decision, investors will likely benefit from maintaining a broad perspective. Policy changes, while influential, are not the sole drivers of markets, and it is crucial for investors to consider a multitude of factors in their investment decisions. Over the long term, we can anticipate both potential policy adjustments and the resilience of broader economic trends to shape the investment landscape.
This document reflects the views of Empire Life as of the date published. The information in this document is for general information purposes only and is not to be construed as providing legal, tax, financial or professional advice. The Empire Life Insurance Company assumes no responsibility for any reliance on or misuse or omissions of the information contained in this document. Information contained in this report has been obtained from third party sources believed to be reliable, but accuracy cannot be guaranteed. Please seek professional advice before making any decisions.
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November 2024
